Buying a House in Today's Market

Since many of our members are considering relocating, downsizing and/or finding housing better suited to their future priorities (e.g. greater energy efficiency), we invited Patrick Killelea, founder of the housing news and forum site Patrick.net, to offer his advice to house buyers in today's market. Patrick was one of the most vocal bloggers warning about the collapse of the U.S. national housing bubble years before it inevitably popped in 2007.

(A note to those of our readers who work in residential real estate: the views expressed here are Patrick's own, which he has consistently maintained for years. While some of them are not popular with the realty industry, the resulting dialogue they have created about the structure of our national real estate model has been a healthy one.)

If you're in the market for a house, there are a number of important factors to consider which your agent just isn't going to tell you.

The first one is that you don't need an agent! There is very little that a buyer's agent can actually do for a buyer. Property for sale is easy to find, and the paperwork is very routine. The agent's sole concerns are first how to manipulate you into signing a contract which will limit your ability to get rid of them, and second, how to manipulate you into bidding higher than you should. The agent's financial motive is to make a sale and get a commission. No sale means no commission. They are going to push whatever pscyhological buttons might get you to buy. So agents invariably use the word "home" instead of "house", because they hope it will trigger warm happy feelings, instead of the feeling of being trapped with excessive debt. Agents are going to stress how successful you'll feel as an "owner" no matter how much you overpaid. They are going to imply that renting is a kind of failure, no matter how much money you can save renting the same thing.

Rather than using a buyer's agent, it is often better to ask the seller's agent to represent you for that one

property they are selling, because in that case, the agent gets double commission if you buy it. This gives the agent a motive to accept a lower bid from you rather than a higher bid from someone with his own agent. Since all bids are secret, it is trivially easy for the seller's agent to hide higher bids from the seller. If you do have a separate buyer's agent it is good to mail a confirmation of your bid to the actual seller himself (not to his agent) to avoid such bid-blocking. But check your buyer's agent contract -- you may have signed away your right to contact the seller directly.

The second factor to consider is whether the house could "support itself" with rent if necessary. If the rent could pay the mortgage, property tax, insurance, and maintenance, then you're very safe from defaulting. If you become unemployed and cannot pay the mortgage, you can simply rent out the house and at least break even. You won't be forced to sell at a loss. Unfortunately, most of the houses that can support themselves with rent are in poorer neighborhoods. High-status neighborhoods generally have house prices far in excess of the amount justified by local rents. Buyers overpay because the want the status of being an owner in

these neighborhoods. Renters can live in the same size and quality house for much less, but they don't get the same status in the eyes of their neighbors. If you can afford to pay a lot extra for that "ownership" status, that's fine. Just be aware that that's what you're paying for. To calculate the gain or loss from owning relative to renting, I've created a free calculator at http://patrick.net/housing/calculator.php

The third factor to consider is making an all-cash offer when high interest rates exclude weaker buyers. The savvy buyer wants interest rates to be as HIGH as possible when buying for cash. High interest rates mean that potential buyers who don't have cash just can't pay as much. This puts the all-cash buyer is a far stronger position. In addition, asset prices generally move inversely to interest rates, so a high interest rate increases the prospect of price gains when rates fall in the future, and those weaker buyers can once again bid. Finally, the all-cash buyer simply saves money by not paying interest, and these savings can be gigantic. The typical mortgage requires a buyer to pay more interest than he pays for the house itself.

The fourth factor to consider is how long you will live in the house. The typical buyer dramatically overestimates length of ownership. The median length of house ownership the the US is only six years. Half of all owners own for less than six years. That six percent agent commission over six years means an additional one percent per year. Think of that in terms of interest rates. An extra percent on your interest rate is huge. If you're not likely to stay put for a long time, it's probably not a good idea to buy.

The last factor to consider is appreciation. The housing bubble was mostly due to unrealistic appreciation

assumptions. Excessive lending can justified by assuming very high appreciation, so there was a motive on the part of both banks and buyers to assume that house prices would continue to appreciate at high rates. Bad lending based on unrealistic appreciation assumptions created a temporary positive feedback loop in prices. The prospect of negative appreciation was not even considered, and most rent-vs-buy calculators would not even accept a negative number. My calculator at http://patrick.net/housing/calculator.php is the only one on the internet that starts with an assumption of falling prices, even if only 1% per year.

While there are many other factors to consider when buying a house, I believe these five are the most important ones.

And for those potential buyers with time on their side, it's prudent to look at the macro environment. At this point in the housing cycle, we are quite likely to see additional price declines nationally. Large numbers of foreclosures are still coming on the market, and the unemployment situation has not improved significantly. The Case-Shiller index clearly shows that a resumption of price declines is already in progress.

Low interest rates in the long-term bond market imply that investors are not expecting significant increase in interest rates soon. Nonetheless, rates may go up if we get salary inflation. Higher salaries due to salary inflation would give workers more money to buy a house, but on the other hand, higher interest rates would put downward pressure on prices at the same time. If you believe salary inflation is coming soon, it makes sense to lock in a low interest rate now. But given the continuing unemployment situation, salary inflation does not seem imminent.

Patrick

This What Should I Do? blog series is intended to surface knowledge and perspective useful to preparing for a future defined by Peak Oil. The content is written by PeakProsperity.com readers and is based in their own experiences in putting into practice many of the ideas exchanged on this site. If there are topics you'd like to see featured here, or if you have interest in contributing a post in a relevant area of your expertise, please indicate so in ourWhat Should I Do? series feedback forum.

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14 Comments

Thank you for the clear and concise advice. It is reassuring to people like me who are still renting. Patrick's calculator is pretty handy. Using it I have discovered it is much less expensive to rent my little home and a very large storage space rather than purchasing the SAME home or something larger and magically getting rid of my storage space (by throwing stuff out for example). I just factor the cost of my storage into the monthly rent estimate on the calculator. I am storing preps and it is actually MUCH cheaper for me to do it this way. When I save enough I can move to a cheaper area and still know how to live in a small home. Just my personal experience. Thanks!

The first one is that you don't need an agent! There is very little that a buyer's agent can actually do for a buyer. Property for sale is easy to find, and the paperwork is very routine. The agent's sole concerns are first how to manipulate you into signing a contract which will limit your ability to get rid of them, and second, how to manipulate you into bidding higher than you should. The agent's financial motive is to make a sale and get a commission. No sale means no commission. They are going to push whatever pscyhological buttons might get you to buy. So agents invariably use the word "home" instead of "house", because they hope it will trigger warm happy feelings, instead of the feeling of being trapped with excessive debt. Agents are going to stress how successful you'll feel as an "owner" no matter how much you overpaid. They are going to imply that renting is a kind of failure, no matter how much money you can save renting the same thing.

While this is true, I used an agent, and found her to be very helpful. She was a friend of my sister, so she couldn't really take advantage of me. I was controlling the houses I was interested in and the price range and what I thought houses were worth. When I bought my current house last year, my initial bid was well below what my realtor suggested. But I got a counter-offer and ultimately, purchased the house, at my price, which was below what my agent thought it was worth. Now, where she was helpful was with the home inspections, testing and such. Having never owned a home before, I certainly needed the guidance dealing with inspectors, well, radon testers, etc. She knew what questions to ask and what problems I should have fixed.

Bottom line: If your on this site, then most likely you know it's a buyer's market and we are coming off the biggest housing bubble in history. You control the price, not the agent. If you need an agent, use their brains for the inspection process. If you are comfortable with the whole process, from start to end, then you are right, an agent is not necessary. Then the strategy of using the seller's agent makes complete sense.

My wife is a realtor and when I see how hard she has to works these days to sell a house I'm wondering why anybody would not use an agent, a service essentially free to the buyer.

Firstly you don't have to sign any contract with your agent, if an agent wants you to sign one just get another one. Most of the agents that came to this business to make easy money during the bubble have been wiped out. A good agent on the other hand would defend your interests and make everything possible to make you happy because this is the way they stay in business, with your referrals. When we bought our house, my agent (a good one fortunately) found out that the yard was omitted in what was included in the sell... just imagine how hard it would have been to fix this mistake after closing or when I will try to sell my house later.

There is also the complete short sell/ foreclosure market that you have no access without an agent. And that's where the best deals are. And buy the way when you deal with short sell transactions it not just an agent that work for you but a team of people, some dealing with the bank, other taking care of the paperwork and so on...

So if you are looking for a house just take advantage of this free service, find a good team of Realtors and don't sign a contract.

This is not intended to start a controversy, but as a help for members. I have a background in real estate purchases for investment purposes dating back 10 years. There are times when I have used them but most times I have not. FWIW I sold every property I owned including my primary residence by the summer of 2007 against the advice of every realtor i know including close friends. Here are some pro's and cons from my point of view

Use a Realtor for 3 reasons:

Use one because you are too busy.

Use one to narrow your choices.

Use one because the exact house you want is already listed with an agent. In this case you have no choice but to use one.

A good realtor will present you with a great selection houses that meet your criteria. You can specify all sorts of things - price, age, location amenities - and they are able to screen properties based on that. This can save a lot of time driving around wasting your time. If your time is more valuable than the extra cost * of a realtor then you should consider using one.

Caution: If the only properties you are looking at are the ones that feature a sign of your agent on them then you are probably not getting the best service. Realtors who "List" a property for sale are entitled to a listing agent's commission (typically 3%). Realtors who bring a buyer to a property and facilitates that sale also gets a commission (also typically 3%) called a "buyers agent" commission. When a Realtor isboththe listing agent AND the buyers agent that person gets both commissions (6% !). So if you are the prospective buyer and you are only seeing your realtor's personal listings, not only are you missing out on a wide selection of properties, but your agent is looking out for their own interests over yours. They are hoping for a double commission on the sale. They should be focused on your criteria, not merely the properties they have personally listed.

Tip: If you have the time search on your own, drive the neighborhood, use websites like Zillow, Realtor.com or others. If you find the property you like without the assistance of your own personal realtor,call the listing agent directly. This will be the person whose number is on the sign at the house. Why? If you speak with the listing agent they will realize they are eligible for a double commission should the sale succeed. You can use this to negotiate an additional price reduction. Instead of the property carrying a 6% premium, you can request the Realtor chip in a little on their end as well.

Remember the Iron Law of Realtor Transactions: No Sale - No Commission

Do not assume they have your best interest in mind. Simply put, realtors want a sale. They WILL negotiate, but they will be negotiating for a sale, not necessarily for your best interests. I firmly believe in incentives. Realtors have an incentive to see a sale go through. They do not have an incentive in telling you to walk away, even if that is the wisest course for you. So if the Realtor knows that heavy trucks run late at night in this neighborhood they will be tempted to not mention it if it would threaten the sale. Read the above again. While there may be some realtors who do sincerely look after their clients best interest, they are doing so despite incentives to the contrary. Use you judgment and knowledge of human behavior.

Do not use them because you are afraid of the paperwork. The Title company will provide you all the paperwork needed to complete the sale. it is their job to ensure a legal transaction. You pay for their services at closing whether you use a Realtor of not so do not overlook this underutilized resource.

Realtors are not free! This is a myth. The price of a realtor is built into every agent listed transaction. The money used to pay for the commissionsis part of the price. Don't believe me? Find any house whose agent listing has expired. Ask the owner if they would subtract the amount of the commission (when it was listed) off the price since the amount of money to them would still be the same. They will say 'Sure", you can bet on it. Don't be fooled by semantics such as "The seller pays the commission". No, the transaction pays for the commission and guess where the money for that transaction (and commission) originates?

A word on Foreclosures. When buyers enter the Default stage of a foreclosure, this is recorded in public records. Everyone is able to access these 'Notices of default" at the county recorders offices. Typically Realtors are not the best source of foreclosure properties unless they either personally get these records themselves or subscribe to a service who does and then offer that service to you for free regardless of if you use them in the sale - very rare. When a Realtor advertises a "Foreclosure" they are inevitably advertising one they have made a listing agreement with (i.e. a tiny fraction of the total out there). They are typically NOT advertising all the available foreclosures since they would not have contractual rights to a commission with the homeowner. I have purchased several foreclosure in the "Default stage" as well as the Auction stage. It's fraught with pitfalls and not for the inexperienced. A Realtor is no insulation from these pitfalls either so don't bring one into the transaction thinking your risks go away. There are deals to be had for sure. But you have to put in the effort and learn the ropes in order to reduce the risks. I recommend a seasoned local investor who you are friends with who will help you out. As an aside, dealing directly with a homeowner is the ONLY way I will deal with foreclosures.

I really thought this article was pretty conventional (discussing the situation as it is rather than how it will be). For example strong advantages of owning your own home over renting are that you can dramatically lower your energy costs (via insulation, air sealing, woodstoves....), that you can significantly lower your food costs (turn most of your land into a garden...). that you can add substantial water storage, make the house much more physically secure, set up multiple energy sources and other things which have been discussed on the forums--things you can't do to a residence you don't own.

I agree I have been frustrated by the limited number of modifications that I can do in a rental, but I am still implementing energy conservation measures in my rental. For example, I have CFLs, just finished my terrace garden, have ample food and water storage (on site and off), means of purifying water, warming my place for short periods of time without electricity or gas, conventional and solar battery options for small items, and blackout curtain/foil in case I lose my AC in the summer (again!). I live walking distance from mass transit stops. I really think some of us simply cannot afford to buy and cannot move away from their work but can still benefit from the suggestions and more importantly the spirit of preparedness of the site.

However, I cannot install a solar water heater, woodstove or plant a real garden which I would love to do and soon. That is still a longer term goal but just not an option now as I am tied to an expensive area by my work. It is a big trade off.

It's great to see your post here! You gave us a link for our Nevada and Calif. including Lake Tahoe real estate search years ago at http://highsierra.com/ We're still there and over the years we have had a lot of involvement in real estate as part of the industry and also buyers and sellers.

I think your introductory post is great to get new buyers thinking about how to do a better job of working in their own interest especially as opportunities arise in the next few years with the market continuing to go lower.

We have bought and sold a lot over the years including our own homes and a rental house that we still have, and we had great results with using the selling agent as our own agent as well last time around. Due to this, we were able to negotiate a lower price exactly as you outlined. All buyers need to learn to be engaged in the process, studious about it, and also learn to be good non-emotional negotiators.

Also, when buying the house we have as landlords, we did our own cash flow analysis when choosing which rental property to buy, and here we are 10 years down the road now and I can say we are glad we chose the property we did instead of the one the realtor wanted to steer us toward ;-) The cash flow calculator you made is the correct exercise for those who want to see if they can buy a rental as an investment rather than a money pit.

If more folks took advice like yours, more would be in great shape instead of a life of renting from the bank.

It beggars me how people think that they can afford a new car, let alone a house.

I earn a wage that would be the envy of most. (Electrician on a vital export harbour in Australia. We hold the nation at ransom.) However, I cannot for the life of me see how I could own these assets that everyone else takes for granted.

In fact my wages buy me a sturdy bicycle and a bottom of the range yacht for a bolt hole. (It cost me $12 000 plus solar cells etc. You cannot stand up in it. But it is all mine.)

There is something awry with my mind that it rejects the common Meme so completely.

Then again Evolution is not a democratic process. Your offspring either make it or they dont.

I only recently became aware that Americans conventionally have a buyer's and seller's agent. Here in the UK, a buyer's agent is very rare. (Maybe less than 1% of sales.)

In England, (it's different in Scotland,) the buyer's solicitor does the title searches, arranges certain environmental surveys, water and drainage reports, and does the conveyancing. If the buyer is getting a mortgage, there will be a homebuyer's report on the property, and the buyer also has the option of having a full structural survey. This is a local surveyor who carries insurance against mistakes.

I think the advice above makes sense. Paying someone to look for property for you sounds like money for old rope.

My question is simply this: there is a lot with four house trailer rentals on it, five houses from us, just outside our little subdivision. (Welcome to SC, home of more house trailers than a retirement community in FL. While we are opposed to buying trailer homes as they are considered depreciating assets (like a car), the land is not depreciating and is arable. We are considering making an offer on it, and restoring two trailers for my son and a trusted member of our prepping community who is starting a fabric business with my step daughter (she's got an inheritance and they know that businessinside and out). The rest of the land would be fenced and farmed.

Taking a loan out on it would break our family's "no debt" policy, but it would be an investment, and the loan would be paid for by the meagar rents. Our home, which my husband bought new 31 years ago, and our cars are paid off. His credit rating is very good. This might be a great way to make things happen for my son, who has found "the one" and will be popping the question soon.

Safewrite, it seems to me the benefits outweigh any risks in this case. What better way to build community than to ensure that your own children are able to stay close. As an added benefit you get more workable land and if need be, the two extra trailers could be rented out. As money gets tighter those trailers would still be helpful ... you could trade living space for farm work.

Here's a quote from FerFal's blog ... posted today:

As for real estate, that was a pretty safe investment. Eventually rents went up so as to compensate for the devaluation. Of course you were much better of with your money in bricks and mortar than in a bank account.

~ s .... still looking for our own safe haven, but California is still so pricey!

My question is simply this: there is a lot with four house trailer rentals on it, five houses from us, just outside our little subdivision. (Welcome to SC, home of more house trailers than a retirement community in FL. While we are opposed to buying trailer homes as they are considered depreciating assets (like a car), the land is not depreciating and is arable. ... <snip> "the one" and will be popping the question soon.

Thoughts?

I think we here in NC will give you a run for ur money in the "home on wheels" area. First a few questions,

What is the area like surrounding the land in question. Meaning, how many other plots like the one you are looking at buying surround that one. Will it be "safe" to garden it and not have it looted?

Also, look at those structures as temporary. They use a huge amount of energy to make them livable in our climates.

How much land? Is there empty land close you could buy instead?

Have you become emotionally attached to the idea since your son will be close?

Now, The up side. You will control those homes and who lives there.

I take it that you will make two real good homes from the four that are there?

How long will you have a note?

Sorry, in re-reading my post it looks like I stirred up more questions than gave solutions.